International Trade – 2021 Year in Review, Predictions for 2022 – Trump tariffs

The year 2021 began with high hopes for international trade as many thought the incoming Biden Administration would undo many of the unprecedented trade actions taken by the Trump Administration and reset U.S. trade policy.  However, at the end of 2021, most of the Trump tariffs remain in effect and the Biden Administration has largely pushed trade issues to the back burner.  Here, we take a look at some of developments on the Trump tariffs this past year and what to expect for those tariffs in 2022.

1. Trump Tariffs

As we noted back in July, the tariffs that President Trump imposed (most notably on most Chinese imports and steel and aluminum imports) are still in effect on more than $460 billion worth of imported goods.  These tariffs have proven quite sticky even though most people recognize that the tariffs have not caused China to improve its intellectual property practices or that steel and aluminum from our closest allies do not realistically pose a national security threat.  Thus far, the Biden Administration has promised a thorough review but has taken only small baby steps on the Trump’s tariffs that have not significantly changed the tariff status quo.

Should people expect any significant tariff relief from the Biden Administration in 2022?  More economists are noting that removing or reducing the tariffs would help ease inflation pressures as U.S. manufacturers and consumers would no longer have to absorb the cost of these import taxes.  With upcoming midterm elections, increasing political pressure on Biden to do “something” about rising inflation may be the only way these tariffs get eased or lifted in 2022.

A. China Tariffs

The China Section 301 tariffs continue to be applied to over $300 billion worth of imports from China.  U.S. importing companies, not China, are paying these tariffs directly, with U.S. consumers indirectly paying the passed down cost of these tariffs.  Although it makes plenty of economic sense to get rid of the tariffs, politically there is little to no chance that the China tariffs will go away anytime soon.  Taking a hard stance against China is one of the few issues Republicans and Democrats can agree on, so the Biden Administration will not likely risk taking any action that might even be perceived as conceding anything to the Chinese government.

As of the end of 2021, the only action the Biden Administration has taken thus far on the China tariffs has been to ask for comments to consider whether the exclusion process should be reinstated.  Only a tiny portion of the covered China products were previously granted exclusions from tariffs, so even if the Biden Administration ultimately agrees to reinstate these expired exclusions, this would not provide any significant relief.  In 2022, the Biden Administration will likely continue to slow play any efforts to ease the China tariffs and take only incremental actions that do not significantly move the tariff needle.

The Phase One deal that President Trump signed in January 2019 called on China to purchase certain targeted amounts of U.S. goods and services through December 31, 2021. Most of these purchase targets were unrealistically high even without a pandemic or supply chain disruptions.  So it is no surprise that China has fallen well short (about 60%) of those Phase One purchase targets.

The big international trade question is how will the Biden Administration deal with a deal that China could never satisfy?  It’s possible that they could take a hard line and say China’s failure to live up to the deal warrants the application of any of the suspended tariffs, but that would likely lead to China retaliating with more tariffs on U.S. exports to China.

On the other hand, it seems more likely that the Biden Administration will try to maintain the current tariff status quo.  They will probably acknowledge that China did purchase increased amounts of U.S. goods and services in certain categories (agricultural products, medical supplies, semiconductor equipment). They will probably note the difficulty for China to meet the Phase One targets due to the pandemic. Maybe they will modify the purchase targets for China to more realistic levels.  Hopefully they will require China’s agreement to lift their retaliatory tariffs against U.S. goods in exchange for any US tariff relief.

Given that the perception of conceding too much to China will hurt them in mid-term elections, most likely they’ll maintain a tough posture against China and continue most of the tariffs while promising to carefully monitor this issue. Bottom line, the Biden Administration likely will do enough to kick the China tariff issue down the road for another year or two without radically changing the tariff situation.

B. Steel and Aluminum Tariffs

On October 31, 2021, the Biden Administration announced an agreement with the European Union to modify the Section 232 national security tariffs on steel and aluminum to allow a certain amount of European steel and aluminum to be imported into the United States duty free. This was the first significant action by the Biden Administration to lift any of the Trump tariffs on steel (25% tariff) and aluminum (10% tariff) that had been imposed since March 2018.

But the agreement to modify the European steel/aluminum tariffs is not as significant as initially portrayed.  Although many headlines announced the “end” or “removal” of the tariffs, the agreement with the EU maintains those tariffs, but shifts their application to EU steel and aluminum import volumes that are above certain duty-free quota limits. Such a tariff-rate quota (TRQ) is arguably better than a tariff because it allows some amount of duty-free imports (about 3.3 million MT of steel and 366 thousand MT of unwrought aluminum and 18 thousand MT of wrought aluminum). But a TRQ, just like a tariff, is still an arbitrary government-imposed restraint on trade.

A certain volume of EU steel and aluminum imports may be allowed in duty-free, but they will still be subject to the complex bureaucracy that administers the TRQ import licensing process. Small/medium companies that import steel and aluminum from Europe will have to manage the burden of yet another administrative burden to get those duty-free imports. Also, the agreement to ease the tariffs for the EU is not as significant because the U.S. had already granted tariff exemptions for Australia, Argentina, Brazil, South Korea, Canada and Mexico.

The U.S. is negotiating similar international trade deals for TRQs for steel and aluminum from the United Kingdom and Japan that hopefully will be concluded sometime in 2022. Such deals are a welcome small step in the right direction, but also they highlight how unnecessary and misguided these steel and aluminum tariffs have been. Steel and aluminum imports from our closest allies should never have been deemed a U.S. national security threat.

The steel and aluminum tariffs have done nothing to address the global overcapacity of steel and aluminum production that comes largely from China. Most Chinese steel and aluminum imports into the U.S. were already subject to antidumping and countervailing duties and Chinese import volumes into the U.S. were pretty low. Perhaps the Biden Administration in 2022 will continue to remove tariffs from U.S. allies. After all the tariffs are removed, the U.S. and its allies hopefully can then work more closely together to address the true problems facing the steel and aluminum industries. Hopefully they can find a way to exert pressure on China to reduce its state-owned steel and aluminum production capacity that floods the global market.